Dear Friend,

This week I wrote an article for Seeking Alpha which describes an option portfolio that bets on VIX moving higher as uncertainty grows over the looming fiscal cliff.  The best part of the deal is that the options will make about a 50% gain even if VIX doesn’t go up a bit over the next three weeks until the options expire.

Please read this important article as it could show you a way to provide extremely good protection against you other investments should the market take a big dive this month.
  

Terry

Black Swan Insurance
 
Here’s the link:

Black Swan Insurance That Might Pay Off Even If There Is No Crash

This is a very simple strategy that involves buying in-the-money Dec-12 13 calls and selling a smaller number of Dec-12 16 calls.  You are setting up a vertical spread for some of the calls and holding several calls uncovered long.  The 13 calls have essentially no time premium in them and the 16 calls have a lot of time premium since they are very close to the money.

The only scenario where these positions lose money is if VIX falls much below 15 when the options expire on December 19.  For its entire history, VIX has traded below 15 on only a few rare occasions, and it always moved higher shortly thereafter.

If VIX does get down close to 15 as expiration nears, additional calls might be sold against the uncovered long calls you own, maybe at the 15 strike..  This would expand the downside break-even range about a half a dollar.

There are a few things that you should know about trading VIX options. Weekly options are not available.  You are restricted to the regular monthly option series.  Even more restricting, calendar spreads and diagonal spreads are not allowed in VIX options because the underlying entity is a derivative rather than an actual stock.  You are pretty much restricted to vertical or back spreads unless you want to post a large maintenance requirement.

In spite of these limitations, VIX options are a lot better than VXX if you want to buy portfolio insurance.  VXX suffers from contango dilution most of the time while VIX fluctuates independent of any such headwinds.

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Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.  Why wait any longer to make this important investment in yourself?

I look forward to having you on board, and to prospering with you.

Terry

I have been using your strategy on a number of issues including IWM, MOS, FCX.  FCX (Freeport McMoran) has performed beautifully, but now I have a situation that I don't believe you covered in the Making 36% Book.  What I have already received  (in FCX) gives me a 50% (or so) profit in just 4 months or about 150% annually. 
 
My question is...  Do you sell the FCX positions here and now, or do you continue selling the calls up until expiration.  I don't believe you ever talk about whether you should let things run (or not) once you get up to (or past) the 36% desired level.  ~ Walter

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Sincerely,
Dr. Terry Allen
Terry's Tips